Time Is the Best Medicine in Making the Switch to Consumer-driven Health Coverage

In the summer of 2002 John Mackey, founder and CEO of Whole Foods Market, took a long walk in the woods to clear his head. Among the issues foremost on his mind was his company’s rising health care costs.

Four and a half months later, in October, Mackey completed the 2,175-mile Appalachian Trail; he also decided that beginning January 2003, Whole Foods would become one of the first large employers to switch exclusively to a high-deductible health plan. For Mackey, a libertarian who believes strongly in individual responsibility, the new plan represented the best way to force employees to be mindful, cost-conscious health care consumers.

But the transition was not wrinkle-free. Despite a short but intensive campaign by Mackey to educate employees about the pending change and its rationale, the top-down decision ran counter to Whole Foods’ democratic culture, upsetting employees who regularly vote on company policy, from how to display produce to whether to hire someone in a store.

"The change was going to happen anyway, which was a little challenging because that does not go with the Whole Foods Market philosophy of having a shared stake," says Amy Schaefer, a company spokeswoman. "But because the plan had to be implemented so quickly, that’s the way it was."

The effort to change health plans provided an intense lesson for Whole Foods, which, along with Wendy’s International and Textron, was among the first companies to make high-deductible health plans their only health care offering: How a company transitions to a new plan is as important as making the change.

Analysts say large employers have learned from the experience of others in recent years and, as a result, are taking longer between when they decide to drop all other health plans in favor of a high-deductible plan and actually implementing the change. A longer time frame may help change employees from passive consumers of medicine to active consumers of their health care.

"For everybody, it’s a change from the traditional plan," says Tom Billet, a senior benefits consultant with Watson Wyatt. "It’s not easy. For the employee, it requires more thought and research. But that’s the idea."

Enrollment in high-deductible plans is growing rapidly. UnitedHealth Group, for example, says it experienced an 80 percent year-over-year increase in the number of businesses offering consumer-directed health plans beginning in 2006, with 11 percent of its large employers making it their only health care plan.

"We’re seeing that mostly the large companies, those with over 2,000 employees, are looking at a year of just education before throwing them into a full-blown CDH model," says Amit Gupta, president of Fiserv Health CareGain, a technology company that helps design consumer-directed health care programs.

Executives at Deere & Co., the company known for its John Deere farm equipment, told its 13,500 U.S.-based nonunionized employees last July that the company would be abandoning its current health plan in favor of high deductibles and health savings accounts partially funded by the company. The news was not a complete a surprise since the company’s CEO, Robert Lane, has been a staunch supporter of President Bush’s effort to expand the tax benefits of the accounts.

What was noteworthy, however, was the company’s time frame for making the change: Rather than enrolling at the next opportunity, in January 2006, the company said it would make the wholesale switch in January 2007, 18 months after its initial announcement.

"If you give them 60 days’ warning, they can’t possibly imagine how they’re going to survive," says Duane Olson, Deere’s benefits manager. "Eighteen months—that’s a catalyst, isn’t it? Once it costs you money, what do you do? You try to figure out ‘What are my benefits?’ What is it going to cost me? What are my choices?’ Now people are asking doctors what their costs are."

Reviving incentives The shift in time frames is due, in part, to disenchantment with high-deductible plans among employees, according to a survey published last year by McKinsey & Co. The survey found that 56 percent of employees whose companies had switched to a consumer-directed plan were less satisfied with their health insurance. Employers, meanwhile, have raved about the cost savings they’ve attained by making the switch.

To bridge this satisfaction divide, large companies are bringing back wellness and preventive programs that may have failed in the past, Gupta says. "Getting people more engaged in incentives is growing because employers want to get people used to the idea of getting rewarded for healthy behavior."

Five years ago Deere canceled an employee assistance program because only six-tenths of 1 percent of employees used the free financial, counseling, and child and elder care services the company offered. As part of the transition to a high-deductible plan, the company brought back the program with expectations that 8 percent to 10 percent of employees would use it.

"I’ve had more employees tell me that this new plan is the final catalyst: ‘If I keep smoking it’s going to cost me money,’ " Olson says.

Deere has supported these programs with online learning modules, newsletters and meetings open to workers and their spouses.

Other common incentives, Gupta says, include deductions in premiums for nonsmokers or bonuses for those who sign up for wellness programs with the intent of encouraging people to use separate accounts to pay for health services. Such programs, like high-deductible health plans, encourage people to make use of free preventive medicine that could eventually help them keep their own health care costs to a minimum.

Like other companies offering high-deductible plans, Deere will offer 100 percent coverage for all preventive health care, as defined by the U.S. Preventive Services Task Force. That includes screenings for common cancers, heart and vascular disease, a variety of infectious diseases, depression and drug abuse, diabetes and a host of other common diseases that are more costly to treat than prevent.

Getting unions aboard It is especially important for Deere to make the transition to high-deductible health care. The company would like to enroll its 8,700 unionized employees in the same health plan when their contracts are up for renewal in 2009. Union workers are currently enrolled in a plan with no premium and a small co-pay for visits to the doctor and prescription drugs.

Bobby Garlan, a vice president of Local 74 of the United Auto Workers in Ottumwa, Iowa, says the possibility of a change in health plan has not yet been discussed, but that any change would be of great concern to his members. Though UAW officials say Deere has traditionally enjoyed good relations with its labor force, the stakes for a smooth change are nonetheless higher for companies with unionized employees. For both employee and employer, the change to a radical new health plan, Olson says, "can’t be a leap of faith. There’s too much at stake."

This was a point executives at Whole Foods quickly learned from their employees. After making the change to a high-deductible plan in January 2003, Mackey and his executives arranged for a companywide referendum on their entire benefits package, including whether to continue using a high-deductible plan.

"The whole concept of working at Whole Foods is about empowerment," says Amy Moore, the company’s benefits manager. "I think in this case they felt employees needed to have their input heard too."

Executives once again explained the rationale for the plan. It went something like this: Whole Foods had quickly grown to become the world’s largest natural foods supermarket chain, but its health care costs had grown faster.

Four out of 10 employees chose to forgo the company’s health care plan, mainly because they were young (the average employee age at Whole Foods is 36) and healthy.

This meant that those who regularly used health care signed up. That group included older employees or those with families, and, of course, employees with chronic illnesses. The result was that the healthy contributed little to the company’s health care pool of money, while the sick spent regardless of cost. The rising costs threatened other core company benefits, like deep discounts on food.

In October 2003, employees passed the consumer-directed plan by a wide margin, Moore says. That year, medical-claim costs dropped 13 percent and about 90 percent of employees had money left over in their health reimbursement accounts. Hospital admissions dropped 22 percent. Since then, health care cost increases for the company have slowed to a pace below national rates, which show growth of 8 percent to10 percent annually. The slowed pace comes despite the company’s explosive expansion to 39,000 employees, up from 24,100 in 2002, Moore says.

The company continues to tweak its plan to meet the needs of employees. This month, Whole Foods began to offer employees disease management programs for people with diabetes, cardiac issues and asthma. The programs are not unlike those that John Deere recently brought back.

"If you want people to be smart consumers, you need to give them the tools and resources to do it," Moore says.

The change in plan, and the company’s response to its employees, seems to be working. Whole Foods employees recently voted to keep their consumer-directed plan as the plan of choice. They will vote again in 2009.